ISTISNA

• It is a sale transaction where commodity is

transacted before it comes into existence.
• After Salam it is the second exception where a sale
is allowed for a subject matter which is not there at
the time of transaction .
• Used where immediate delivery of the sold
commodity is not possible.
• The price is also payable by mutual consent ( In
advance, in tranches , or at the time of delivery of
goods)
 ISTISNA Definition
• It is an order from purchaser (buyer) to a
producer/manufacturer(seller) to manufacture a
specific commodity for him (buyer) against a
mutually agreed price and period for
manufacturing and delivery of those goods.
 ISTISNA Explanation

• Essential requirements for istisna :

1. Goods / Commodities should require
manufacturing.
2. Manufacturer (seller) must use his own material.
3. The quantity must be known and specified in terms
of kind , type, quality and quantity.
4. Price of goods must be fixed in absolute and
unambiguous terms.
 ISTISNA Explanation
Price of Goods in Istisna:
• Can be paid in immediately (spot).
• Can be paid at delivery (deferred).
• Could be paid in Installments , the
installments may be tied up with different
stages of Manufacturing process.
 ISTISNA Explanation
Beginning and Cancellation of Istisna:
• The order of purchaser (buyer) for manufacturing is
‘Offer’.
• Therefore if the manufacturer accepts this offer to
manufacture the goods with his own material, the istisna
transaction is effected.
• However the transaction is not binding upon both before
real expenditure 9 price or part of price from buyer, or
start of work from buyer).
• Therefore the contract of istisna can be cancelled
unilaterally before payment of price/or part of it by buyer
and before start of work from seller.
 ISTISNA Explanation
Option of Refusal:
• The orderer ( buyer) cannot refuse to accept the
manufactured goods if they conform to the
specification agreed between the parties.
• IN case of obvious defect in manufactured goods, the
buyer has right to decline acceptance of
manufactured goods/commodities.
• The buyer can tie up the acceptance of delivery to a
mutually agreed time period, after which the buyer
can refuse to accept the goods.
 ISTISNA Explanation
Time of Delivery:
• It is not necessary to fix exact time of delivery,
• Delivery is to be made as the goods are ready to
deliver.
• However the purchaser may fix a maximum time for
manufacturing the goods.
 ISTISNA/SALAM Comparison
1. The subject matter of an Istisna contract is always something
which requires manufacturing, where as in Salam it could be
anything which can satisfy salam conditions laid down by
Shariah.
2. Price may be paid under any agreed schedule in Istisna,
where as in Salam it has to be paid full in advance.
3. In Istisna contract can be cancelled unilaterally before the
manufacturer starts work, whereas salam contract , once
effected, cannot be canceled unilaterally.
4. 4. Time of delivery in Istisna may be changed with consent of
the contractors. Whereas in Salam determining the exact
time of delivery
 ISTISNA-APPLICATION
• Istisna can be used as a mode of financing in Housing
Finance by the Islamic Bank.
• If the client has his own land and he wishes to obtain
financing for the construction of the house, the bank
may undertake to construct the house at that open
land , on the basis of Istisna.
• If the client has no land and wishes to purchase the
land as well, the bank may also provide a constructed
house on a specified piece of land.
 ISTISNA-APPLICATION
• In such scenario bank can appoint a contractor to get
the house constructed and it may appoint customer
as its agent to over see the construction
• Payment to the contractor can be linked to the stages
on construction and payment from customer may
also be agreed in any manner.
• The bank may mortgage the house as security till
payment of the full price to customer.
 ISTISNA-APPLICATION
 Istisna can be used by Govt. for infrastructure
development as well example is construction of
Highway. Govt. may appoint a construction firm to
build a motorway on BOT basis. The price in this case
could be the right of company to operate the
highway and collect TOLL from the users for a
specified period. After the period is completed the
Govt. can takeover the project.
 ISTISNA-APPLICATION
Construction of an Oil Terminal:
• A company approaches an Islamic Bank to obtain
financing for the construction of an Oil terminal
• The company wished to payback the financing within
6 years , with a grace period of 2 years for
construction.
• Bank and the terminal operator entered into an
agreement of Ijarah.
• Istisna agreement was executed b/w construction
contractor and bank
 ISTISNA-APPLICATION
• Bank appoints terminal operator ( the end customer)
its agent , through agency agreement to supervise
the construction.
• After completion of construction bank and terminal
operator enter into Ijarah agreement .
 RISK AND MITIGANTS IN ISTISNA
1. Delivery risk: Delay in delivery of goods from
manufacturer to bank. As a mitigant Istisna price
can be reduced on daily basis to penalize the
manufacturer.
2. Non Performance: The manufacturer may not be
able to manufacture the goods , during assigned
time and refuses to carry on responsibility any
further. As a mitigant bank can terminate Istisna
contract and demand the price back, or price can be
paid in installment after being satisfied with
performance.
 RISK AND MITIGANTS IN ISTISNA
3. Quality risk: The manufacturer delivers defected /or
lower quality goods. The bank can reject the goods and
demand the price back.
4. Price risk: Market price of the subject matter decreases
after the bank enters into Istisna agreement . Parallel istisna
or a promise to purchase from a 3rd party can be obtained.
5. Storage risk: Once goods manufactured they are in
ownership of bank and at banks risk before being sold to
purchaser. TAT can be reduced between delivery of goods to
bank and sale to ultimate purchaser or Takaful cover can be
obtained